To preserve firm value during a crisis, it’s better to curb bad deeds than to do good deeds.
So concludes a new study, co-authored by Alan Muller of the University of Washington Foster School of Business, that analyzes the company-side impact of a widespread natural disaster—such as Hurricane Katrina, which devastated the Gulf Coast in 2005.
Muller’s study finds that events such as Katrina have a negative financial effect on firms across the market, leading to a 0.27 percent drop in stock price, on average. Some companies, however, are better insulated against negative investor reactions by their reputation for corporate social responsibility (CSR).
“When there is a negative event that could potentially affect a firm’s competitive position, ability to deliver its product or image among consumers,” Muller says, “the firm’s ability to bounce back quickly depends in part on its reputation as a socially responsible company.”
But which kind of CSR behaviors matter most for building a positive reputation: good deeds or the lack of bad deeds? This is a key question since most firms do both good and bad, often simultaneously.
More good vs. less bad
To find the protective quality of these different forms of corporate social responsibility, Muller and co-author Roman Kräussl (of VU University Amsterdam) observed the share performance of the US Fortune 500 as the Hurricane Katrina disaster unfolded. They cross-referenced each firm’s stock price movements with its performance on the KLD dimensions of corporate social responsibility from 2000 to 2004. KLD Research and Analytics, Inc. is an organization that tracks responsible and irresponsible behavior in community relations, corporate governance, diversity, employee relations, environment, human rights and product.
What Muller found is that the more a firm was known for social irresponsibility, the harder its stock price was hit in the wake of Katrina, and this negative effect was not mitigated by a history of good deeds. The authors also noted that investors were unmoved by incidents of subsequent corporate philanthropy targeted toward disaster relief (another “good deed”).
Despite this reality—though perhaps not surprisingly—firms known for social irresponsibility were the most likely to engage in disaster relief. Companies like Wal-Mart, not widely considered exemplars of CSR, were quick to establish a beachhead in the relief efforts.
Run a clean shop
As a strategy to protect stock prices in an economy-wide crisis, concludes Muller, such positive actions fail. “There are many good reasons for corporations to engage in disaster relief,” he says. “But insuring against current or future negative stock price movements is not one of them.
“A firm’s track record of minimizing its negative impacts appears to be a more genuine signal of trustworthiness that gives investors confidence in short-term recovery, not the accumulation of good deeds they do.”
Muller suggests a better strategy—keep a lid on irresponsible behavior. “Obviously, the good a company does matters to many stakeholders,” he adds. “But if you are doing good deeds for strategic reasons—because you think it will help you better weather future ‘storms’—then you should think more about cleaning up your messes.”
“Doing Good Deeds in Times of Need: A Strategic Perspective on Corporate Disaster Donations,” by international business senior lecturer Alan Muller of the University of Washington Foster School of Business and Roman Kräussl of VU University Amsterdam, is forthcoming in the Strategic Management Journal. A condensed version of the study, “Social Irresponsibility, Firm Value and Philanthropy: The Corporate Response to Hurricane Katrina,” is also included in the 2010 Best Paper Proceedings of the Academy of Management.